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In mid-2005, the director of the Division of Securities told state investigators to "stand down" in their probe of Val E. Southwick, the Ogden businessman who pleaded guilty in March in what appears to be the largest financial fraud in Utah history.
That order, referred to in an internal division memo that pointed to political interference in the investigation, came after a meeting between the head of the Department of Commerce and an attorney hired by Southwick because of his political and government connections. The lawyer brought along a prominent Republican lobbyist and consultant.
The stand-down was just one of many delays in the investigation that over the next 15 months enabled Southwick and his web of 150 or so companies collectively known as VesCor to continue to defraud dozens of investors to the tune of millions of dollars - on top of the hundreds who already already had lost millions in previous years. It was not until early 2008 that state got around to charging Southwick.
The VesCor web has since collapsed, and investors' money largely appears to be gone for good, costing some their life savings. Many have been left to wonder why it took so long for state regulators and prosecutors to bring an end to Southwick's operations.
The memo, other documents and interviews with current and former state officials, show that in addition to political pressure there were other factors at work.
Division of Securities officials past and present contend that a lack of accurate financial information, their assertion that they did not know Southwick was running a Ponzi-like operation and an unwillingness by investors to cooperate meant the division had no sense of urgency to investigate until late 2006. Yet, dating back to the 1980s, Southwick was the subject of dozens of lawsuits in two states and had twice faced sanctions from Utah regulators over violations of securities laws.
The explanation from the division - which had five directors or acting directors in a 10-year period dating to 1998 - for its inaction is of no comfort to investors who were duped by Southwick.
"I felt they were underperforming," said Jonathan Horne, who invested $2.7 million in Southwick's companies in 2005. "I think they knew about the problems long before I put my money there, and they could have notified the state, the city, the brokers. It's criminal. I think they really harmed all these people, including myself."
Southwick was charged in February with nine felony counts of securities violations in the years 2004 to 2006. By then, he had stopped paying interest obligations and filed for bankruptcy, which revealed he had as much as $450 million in debt and that more than 800 investors were out as much as $180 million.
Political connections: "It is no secret VesCor has political ties to the Legislature," said the July 21, 2005, memo from the VesCor Task Force. The group was formed by Francine Giani just after she was named executive director of the Department of Commerce, which oversees the securities division. (She was not officially confirmed by the Utah Senate until that August.)
"A significant amount of political pressure already has been exerted in this case," the memo said.
Asked about those ties, division officials point to a June 2005 meeting that involved VesCor's attorney, Mark Griffin, and Russell Skousen, who was named as head of the Department of Commerce for a brief period after serving as legal adviser to Gov. Jon Huntsman Jr.'s election campaign.
They said the meeting was called because state investigators were pressuring the company to come up with an audit of its 2003 and 2004 financial results to prove that it was solvent. The department also wanted proof that VesCor could complete its real estate projects and pay investors.
Dwight Williams, an attorney who also had represented VesCor, said he had became frustrated in early 2004 when Southwick kept failing to produce the audits the securities division demanded. Southwick was upset about the pressure and wanted to deploy some "political" influence, Williams said.
"I wasn't getting anywhere, and he's the one who brought up the idea of being better connected, and I agreed with him" Williams recommended that Southwick hire Griffin, who had relationships with federal and state securities officials as a former director of the Division of Securities. Griffin also had been a Republican candidate for Salt Lake County district attorney.
In 2004, Griffin had convinced then-securities division Director Anthony Taggert to give VesCor more time to comply with division demands, said Benjamin Johnson, the division's manager of corporate finance. In October of that year, Southwick and other company officials promised they would not sell any more investments to Utahns or anyone out of state.
By 2005, the division again pressured Southwick for financial information, which apparently prompted the June meeting between Griffin and Skousen. After that meeting, then-securities division Director David Preece told investigators to "stand down," Giani said.
"All that Mr. Preece told me was a meeting had occurred and that division personnel were not to take any specific actions related to VesCor unless given the go-ahead from him," Johnson said.
Skousen, in a recent interview, denied he had bowed to political pressure.
"I don't remember specifically what was said. It's just my vague recollection when the meeting was done there was some time [given to VesCor] to get their audit done."
And Skousen denies he had a conflict of interest because his former law firm, Makey Price & Thompson, had represented VesCor.
"I never represented Val Southwick and, in fact, it's my understanding the attorney who did was an outside attorney 'of counsel,' " he said.
That attorney, Williams, said the role meant he was affiliated with Makey Price & Thompson but no longer had an ownership interest in the firm. Williams said Skousen likely knew of the case as a member of the firm.
"I didn't see it as a conflict, but the conflict was resolved," Skousen said, when he resigned in August 2005 over salary.
VesCor attorney Griffin also denied that Skousen was politically pressured, saying the meeting concerned when VesCor would produce the audit. He added that the company was always exposed to the possibility of a receiver being appointed or of a forced bankruptcy.
Skousen and Griffin said they couldn't recall anyone else at the meeting who might have had political connections.
But Ron Fox, a Republican lobbyist and consultant, said that in 2005 he was hired by Griffin's firm to discuss seeking changes in state securities laws from the Legislature and to help VesCor buy more time for its audit.
Fox said he'd known Skou- sen before his appointment to the securities division, adding, "I certainly understand the process about how things work in government."
That said, Fox insisted "all we were doing [in the meeting] was seeking additional time for Mr. Southwick to respond to the division questions."
Preece, who deflected questions about political pressure, said could not recall conveying the "stand down" message to division staff. "I might have urged him [Johnson] to make sure we do it by the book and do it by the numbers."
Skousen blamed the allegations of political interference on the Division of Securities "getting lots of heat for not doing anything for some time. They're reaching pretty far back for an excuse."
Southwick falls: The 2005 memo was followed by a draft order that alleged VesCor had violated securities laws. The memo also had posed a scenario in which a receiver would be appointed to take over VesCor and liquidate it, or proceed with real estate development, in order to pay off investors.
"Otherwise, the task force recommends the division file a criminal action alleging securities fraud against VesCor and Southwick," the memo says.
But Johnson contends that the division lacked sufficient evidence to request a receiver. "This requires either complaining investors or substantial inside information, neither of which the Division of Securities had."
In August 2005, division staffers met with prosecutors in the Utah Attorney General's Office to review the case against Southwick.
"They told us that we had some technical violations, but they wouldn't amount to anything from a sanctions standpoint," said Leigh Davis-Schmidt, an examiner in the Division of Securities and author of the memo.
No investors had complained to the division nor even inquired about the VesCor companies or Southwick, officials said. Part of the reason may be that Southwick made payments to some investors who were complaining the loudest - money that may have come from new investors he solicited through September 2006.
Southwick also sent out letters warning investors that going to authorities would only delay payments and could greatly reduce the amount they got back.
Division officials contend they did not know Southwick was violating the 2004 agreement by taking in new investors. The state investigation later showed that at least 51 Utahns bought investments after the agreement and lost $11.5 million as a result.
"In this case we didn't really even suspect there were new investors [after October 2004] because we thought it was just a matter of helping the previous investors to find the best way to liquidate it," said Thad Levar, deputy director of the Department of Commerce. "There was no idea that something needed to be slowed until really '07. Late '06, early '07 is the first time we really had an idea."
New information: Division officials say their first "ah-ha" moment came in October 2006, when VesCor told the division it could not provide the audited financial statements for 2005 and that investors had not been paid since May, said Wayne Klein, securities division director from November 2005 to March 2008.
"Now we discover for the first time that they are in serious financial trouble, and we start to then wonder: Have they been selling to people in Utah, and why in the world for four months have people not been getting paid and aren't saying anything?" Klein said in a recent interview.
Late in 2006, the division decided to launch an investigation, Klein said. It spent $40,000 to scan hundreds of VesCor documents and hired an outside attorney to comb through the records and help with the investigation. Criminal charges were leveled in February.
The moves come too late, in the opinion of some investors and their attorneys.
Craig P. Orrock is a former IRS attorney in Utah who filed lawsuits on behalf of two Nevada investors in VesCor, in return for a percentage of any money he recovers.
He said he gave information he had uncovered to the division in August 2004. That information was the basis for a 2004 lawsuit in Nevada in which Orrock and Salt Lake City attorney Peter Guyon charged that Southwick was running a Ponzi scheme, using investors' monies for personal use and hiding assets - the earliest allegations that Southwick was operating a giant fraud.
"In my mind, the state of Utah, by not enforcing the law, cost Southwick victims over $150 million in investment capital," Orrock said. "Somebody should pay the price for this gross negligence."
Giani points to the division's duty to meet strict legal standards.
"Hindsight is always 20/20, but even at that I believe that we moved quickly. I don't look back at this and think that we missed it."
Hearing set for Thursday
A 3rd District judge has set a hearing in the criminal case against Val E. Southwick at 1 p.m. Thursday.
Judge Robin W. Reese ordered a presentence report, meaning he could sentence Southwick at that time on Southwick's guilty pleas to nine counts of violating state security laws. Reese also could review the case and set sentencing for another date.
The hearing is scheduled for Room S32 of the Matheson Courthouse.
The leadership
Klare Bachman
07/01/2003 to 12/31/2004
Russell Skousen
01/05/2005 to 08/15/2005
Francine Giani
08/15/2005 to present
DIRECTORS OF UTAH DIVISION OF SECURITIES
S. Anthony Taggart
07/25/1998 to 09/24/2004
Jason Perry, acting director
09/25/2004 to 01/02/2005
David Preece
01/03/2005 to 10/24/2005
Jason Perry, acting director
10/25/2005 to 11/06/2005
Wayne Klein
11/07/2005 to 03/31/2008